A Stitch in Haste

I'm one of the estimated two million people who suffers from iPod "battery failure" syndrome. I've also been notified that I qualify for the Apple iPod Battery Settlement.

Which leaves me in a bit of an introductory economics conundrum.

As member of the plaintiff class, I'm entitled to my choice of either of two forms of compensation:

1. Receive a $50 voucher good for the purchase of iPod merchandise (excluding iTunes downloads — bummer).

2. Play a lottery in which I return my iPod to Apple and get back either: (a) the same iPod with a new battery, or (b) an entirely new iPod. Apple provides no guidance as to the respective probabilities of either alternative.

I could teach almost an entire introductory economics course with only this simple fact pattern!

Some economics-oriented hasty stitches:

--Cash is king. A $50 voucher is almost totally worthless to me, since, having perused the iPod Store, there is nothing there that I would want to buy. I would gladly take a substantially lower cash value — perhaps as low as $10 — instead of a $50 voucher. This illustrates the financial concept of a "discount rate" — I have to discount the nominal $50 value to derive the true, or real, value of the voucher to me. (Purchasers of much older iPods do have the option of receiving $25 cash or the $50 voucher — a remarkably high 50% discount rate — but purchasers of newer iPods must choose the voucher or the replacement program.) Note also that, since the vouchers are non-negotiable — or in macroeconomic terms, not widely accepted for value — they are therefore not a good form of money.

--Revenue versus margin. Even if I were to use the voucher to buy a travel case or something, $50 to me is not $50 to Apple, but rather only the cost of the merchandise, which is of course less than $50. In accounting terms:

revenue - cost of goods sold = gross margin.
Note also that Apple gets to claim in its marketing that it is "giving away" more value than it really is, since, from Apple's perspective, the vouchers' face value is greater than the true cost to the company.

--Income elasticity of demand. On the other hand, if I had been planning to buy $50 or more of iPod merchandise anyway, then what is the impact to Apple of providing the voucher? Assume I was going to buy $100 worth of merchandise in the iPod store, but now I have a $50 voucher. Do I still buy $100 worth of merchandise and pocket $50 in cash, or do I now buy $150 worth of merchandise (i.e., "I was willing to shell out $100 in cash anyway...")? Or do I split the difference, perhaps buying $125 worth of merchandise? The answer depends on an important microeconomic concept called the income elasticity of demand. (This phenomenon also plays an important role in macroeconomics, via the marginal propensity to consume.)

--Time value of money. "Well gee, Kip, if you don't wan't the voucher then obviously you should send your iPod back to Apple." But, even with free shipping and such, this option would not be costless to me — I would be without my iPod for a certain period of time! A fully-functioning iPod tomorrow is not worth the same as a fully-functioning iPod today. In order to make truly rational economic decisions, I need to incorporate that time cost into my calculus. By the same token, any item of value — even money — is worth less in the future than it is today. That's why we have interest rates.

--The lemon effect. You may have heard the expression "A new car loses 20% of its value the moment you drive it off the lot." That's called the "lemon effect." Should I value a new iPod over a refurbished one? Probably, if for no other reason than because I could theoretically sell a replacement iPod for more than I could get for my refurbished iPod. My iPod also has some scratches and dings that diminish its aesthetic value somewhat. The extent of the lemon effect may affect some owners' decisions whether to take the voucher instead of the replacement program.

--Expected value. A related concept to the lemon effect. If I choose the "replacement lottery" (note that I am not using the word "lottery" flippantly — it's a precise mathematical concept), then I should not expect a new iPod, nor should I expect a refurbished one, but rather something "in between" the two, based on the respective probabilities of the two outcomes (which, again, Apple is unfortunately not disclosing). On the other hand, after the fact I can't really receive some bizarre hybrid iPod that is "half new" and "half refurbished" — it's metaphysically impossible. The device I actually receive has to be one or the other, but I have to base my decision beforehand as if there could be such a thing as an iPod that is partially new and partially refurbished. This analysis — the mathematics of risk and uncertainty — underlies almost every aspect of economics.

In the end, I fully intend to send my iPod back to Apple. I will, however, carefully time it around my travel plans so I should not be without the iPod on any upcoming flights, when I value it the most. I've already submitted the claim form.

OPEN THREAD: Is anyone else eligible for the iPod settlement? Which option are you choosing, and why? Also, which do you think is more likely: that Apple will expend the labor and materials to manually refurbish returned iPods, or simply ship out new ones? I strongly suspect it will be the latter, but perhaps I'm being overly optimistic?

UPDATE: Overlawyered points out that the plaintiff class' attorney's fees total $2,768,000 and has the official "Overlawyered iMix" of songs that have led to litigation.

It is a basic premise of tort law that a plaintiff, in order to win a judgment against a defendant, must prove damages — some form of measurable and compensable harm.

Or at least it used to be:

A Louisiana man claims in a lawsuit that Apple's iPod music player can cause hearing loss in people who use it.
...
The iPod players are "inherently defective in design and are not sufficiently adorned with adequate warnings regarding the likelihood of hearing loss," according to the complaint, filed Tuesday in U.S. District Court in San Jose, Calif., on behalf of John Kiel Patterson of Louisiana.
...
Patterson does not know if the device has damaged his hearing, said his attorney, Steve W. Berman, of Seattle. But that's beside the point of the lawsuit, which takes issue with the potential the iPod has to cause irreparable hearing loss, Berman said.

Oh really?

Let's review some product liability law: To prevail, the plaintiff must show that a product is either defectively manufactured, defectively designed, or improperly labeled.

No one, not one single person anywhere (including this plaintiff), has demonstrated that the iPod is defectively manufactured (with respect to headphones, that is). No one has gone deaf from iPods.

As for defective design — the very fact that the iPod is by far the best-selling MP3 player is fairly convincing proof to the contrary.

As for defective labeling, the iPod already includes a warning about volume.

One might ask why Apple designed the iPod to allow for "defectively" high volumes. Well, I for one leave my iTunes and other media software volume settings on maximum and control my speaker volume instead. Perhaps people who use the iPod without headphones want the same option. I, like many others, also don't use Apple's ear-bud headphones.

In any case, the real point here is, as I said, that the plaintiff has not demonstrated hearing loss. How can he possibly have standing to sue, let alone serve as the representative plaintiff of a class action?

The mere potential for harm is not, without more, sufficient to allow a lawsuit. This is not asbestos, in which the connection between exposure and a serious risk is well-established. Neither is this Vioxx, where the (alleged) risk of a cardiac event was (allegedly) concealed from doctors and patients. Finally, this is not a question of iPod battery failure, which is a real phenomenon that has been well documented and has caused real economic harm to iPod purchasers.

No, this iPod litigation is mere speculation: "maybe someday somebody somewhere might have some form of hearing loss..."

That is simply not a valid lawsuit.

More thoughts from Overlawyered, Adrift at Sea, Division of Labour, Rolling Doughnut, Truth on the Market, Atlas Blogged.

(Cross-posted previously at Overlawyered.)

A few quick thoughts about the massive Dell battery recall:

The relatively new Restatement (Third) of Torts: Product Liability proposes some modifications of the common law duty to warn after a sale (as opposed to a duty to warn -- i.e., on the packaging -- before a sale).

Of course, a manufacturer remains strictly liable for any damages proximately caused by a manufacturing defect before a post-sale warning or recall is announced. Under the Restatement (Third), Section 11, there is still never a "duty to recall," unless imposed by the government.

Previously, the determination of whether there was a "duty to warn after the sale" was no different than any other test for duty: Did the benefits of a post-sale warning outweigh the costs?

On the benefits side: How many defective products were sold? How many are likely still in use? What is the probability and nature of the danger resulting from the defect?

As for the costs of warning: How geographically diverse are the customers? How easy or difficult would it be to communicate the warning -- would a press release be sufficient? Is the product likely to have been resold? And, almost uniquely relevant to Dell, does the manufacturer have a customer database?

I think most would agree that under this old balancing test, it is unsurprising that Dell choose to warn about the defect, and indeed to take the added step of initiating a recall.

Under the new Restatement (Third) test (Section 10), meanwhile, the analysis is a bit more manufacturer-friendly. In order to find a duty to warn after sale, each of four separate conditions must be met:

1. There must be a substantial risk of harm (i.e., even if the cost to warn would be low).
2. There must be easily identifiable users, who are unlikely to be aware of the harm.
3. There must be an easy way to communicate the warning.
4. The risk of harm must significantly outweigh the cost of warning.

So the cost-benefit analysis must not only tilt toward a post-sale warning, but it almost has to be a slam-dunk: very high risk and very low cost.

On the other hand, as customer databases become more common, email marketing lists become ubiquitous and news is spread not just by manufacturers and media but also by cyberspace (such as this post), the cost to warn approaches zero and the duty test essentially reduces to "Is the risk high enough to warrant a post-sale warning?" Which is arguably less manufacturer friendly than the old paradigm. So even though the Restatement nominally reduces liability for manufacturers, in practice it may actually increase it.

The more things change...

Meanwhile, I haven't found any evidence yet of class actions against Dell being formed or potential plaintiffs being solicited. But it's probably just a matter of time.

---

Speaking of battery litigation, you may also have heard or are part of the other infamous "battery scandal" -- the massive iPod battery class action. I am/was a member of the class and blogged about it here.